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New signs of optimism emerge after markedly smaller grape harvest in 2012; debt falls but returns not acceptable to investors

Posted in Rural News

Over the next few weeks we are extending our series on the New Zealand wine industry, this time based on the Deloitte 2012 industry benchmarking survey.

By Tim Burnside and Paul Munro*

​With annual export earnings of $1.2 billion the New Zealand wine industry is now ranked as New Zealand’s eighth most valuable export earner.

This is a far cry from the small domestically focused industry that existed 30 years ago and despite the recent financial challenges experienced the industry has continued to grow.

In recent years the industry has experienced the impacts of the Global Financial Crisis, supply imbalances, high external debt levels, the increased presence of bulk wine sales, and winery struggles, failures and receiverships.

Now in its seventh year the annual Deloitte financial benchmarking survey, produced in conjunction with New Zealand Winegrowers, has tracked the impact of these issues on the financial performance of wineries within the industry. Last year this survey reflected signs of an industry turnaround but the expectation was that it would take time to fully flow through to wineries.

The results of the seventh annual survey on the whole confirms further improvement but there is certainly still a long way to go to be at a point where the financial returns from the industry provide an appropriate financial return on the capital invested.

Once again this year we collected two years of financial data so that we could make direct comparisons year on year rather than comparing to the previous surveys sample.

We are pleased to report that all but the $20m+ category have improved their profitability from the prior year when their two years data is compared, which given the majority of the categories recorded increases last year (from 2010), confirms a turnaround is definitely present within the industry, and showing signs that it is sustainable.

Despite the positive signs of a turnaround there is still a long way to go.

The $0-$1.25m category has recorded a loss this year suggesting financial volatility remains at the smaller end of the market. In addition only the two largest categories have recorded double digit profitability and returns on equity and assets are low.

The industry is still at a stage where financial returns would not be acceptable to investors, especially over the long term.

In recent years a concerning trend of high external debt has come through the results. It is pleasing to report that this year this issue does not seem as prominent as in the past, with debt levels reducing to more acceptable levels.

It appears that the expected pressure coming from lenders for wineries to reduce debt levels is starting to materialise.

Consistent with all our previous surveys exports remain an integral part of the New Zealand wine industry with all categories exporting greater than 50% of total sales into export markets. This is extremely positive as well given we are generally seeing an increase in case sales.

While this would be a product of the smaller harvest it could imply that demand for branded product is strengthening on the global stage meaning the potential damage to New Zealand’s reputation as a quality producer, by sales of bulk wine, may have been avoided, but further research would be necessary to confirm this.

Related to the dependence on exports and again continuing a theme from prior years is the fact that Exchange Rates have been ranked as the number one issue facing the industry. All of New Zealand’s export industries are hurting due to the high NZ dollar and the wine industry is no exception.

Deloitte perspective:

It is very pleasing to see that the Vintage 2012 survey results continue to support the signs of a turnaround within the industry which began last year.

We do however consider, and we’re sure most industry participants would agree, that further improvement is necessary. As has been widely reported in the media the Vintage 2012 harvest of 269,000 tonnes was significantly reduced from 2011 at 328,000 tonnes.

As is illustrated in the graph below the New Zealand producing area has grown over the last ten years to 33,400 hectares but the last three have been constant at this level. This was on the back of, at the time, record harvests in 2008 and 2009 and the creation of a supply / demand imbalance.

With the reduced harvest in 2012, which has primarily been attributed to seasonal conditions, it is our understanding that wineries have begun to get a little nervous around future grape supply. This is supported by the increase in grape prices being reported and the fact that “Grape Supply – too little” has made a significant move in the list of issues facing the industry identified in our report.

Last year this issue was ranked ninth whereas this year it has been ranked fourth overall , and the $20m+ category having it in their top two.

It is hoped that if wineries and grape growers are considering planting additional vines, in a hope to mitigate this issue, that any such investment is carefully assessed to ensure it is strongly market led and there is no repeat of the supply / demand imbalance seen in recent years.

For the industry to create value, rather than prioritising additional plantings, the first task is to grow the value of sales rather than the volume of sales.

To do this an investment in brands and market development is required rather than investing in further vines.

Growing profitability will create value, but further improvement is definitely required.

Value driven, market demand led yield management needs to be the primary focus of wineries in the future to avoid the experiences of the last four years becoming a reoccurring trend.

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Paul Munro is a partner in the Christchurch office of Deloitte. You can contact Paul here ». Tim Burnside is an associate director at Deloitte.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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14 Comments

Expect to see vineyard land

Expect to see vineyard land price creep up like dairy land price did.

Banks will squeeze off 90% of profit as interests.

NZ, as a land-based economy, ought do something to her tax system, perhaps, to bid up prices in non-tradeable sectors.

NZ, as a land-based economy,

NZ, as a land-based economy, ought do something to her tax system, perhaps, to bid up prices in non-tradeable sectors.

 

What!!!!

From Stats NZ

In the September 2012 quarter, the tradable component of the CPI remained unchanged and the non-tradable component of the CPI rose 0.5 percent.

The tradable component was influenced by seasonally higher prices for vegetables. Prices for furniture and furnishings, fruit, and package holidays also rose. The main individual downward contributions to the tradable component came from lower prices for second-hand cars, petrol, and dairy products.

The rise in the non-tradable component was mainly influenced by increased local authority rates. Rentals for housing, dwelling insurance, and purchase of newly built houses also rose. The main individual downward contributions to the non-tradable component came from lower prices for domestic air fares and telecommunication services.

For the year to the September 2012 quarter, the tradable component decreased 1.2 percent, reflecting lower prices for dairy products, audio-visual equipment, and meat and poultry. This is the largest annual decrease in tradables since a 2.3 percent fall in the year to the March 2004 quarter. Prices for the non-tradables component increased 2.3 percent, reflecting price rises for cigarettes and tobacco, rentals for housing, and electricity.

Expect to see vineyard land

Expect to see vineyard land price creep up like dairy land price did

Interesting comment. I spoke to a reliable source who said that price of vineyard land in Central Otago is on the up.  Could it be that dairy is creeping in and forcing the price up.  I heard that 1100ha of Bendigo Station near Lake Dunstan has been sold to dairy interests. 7 big irrigators going in. I am aware of Southland farmers buying land near Cromwell, to irrigate for wintering their herds on.

 

Agree with what I'm seeing...

Agree with what I'm seeing... the return is not there in the industry compare with Dairy.

Banks will squeeze off 90% of

Banks will squeeze off 90% of profit as interests.   ?????

Xingmowang - You mean the

Xingmowang - You mean the same as the fertiliser, feed, machinery servicing, power companies, and other service providers including accountants, will expect to get paid ? Costs are costs, which you have at least some control over, but in farming in particular, income is variable which you have little control over, and that's the challenge farmers face. 

What landlords, farmers,

What landlords, farmers, power and petrol companies have in common is the apparant in-ability to see the consumer and the economy cannot pay ever higher prices.  The petro companies I think get it and are being mecenary in how they go about managing the situation.

Indeed I suspect the last is knowingly and willfully keeping us adicted.  By that Im sure they figured out that there is a limit on how much ppl can pay for petrol as sales have declined and I think thats been a surprise.  NZ Power companies are seeing the same thing as power use is down, Im not so sure the old annnual useage increases are coming back.

Ive watched meat stay essentially the same $s for 4 years, maybe even drop a bit. I now buy 10~20% of what I used to, thats also reflected in falling meat consumption stats....its interesting watching just what consumers are cutting back on.

If the likes of Big Daddy are any indication Im not sure landlords get it, yet,

Meanwhile costs are ever rising, councils etc dont seem anywhere near realising the problem that they have...

regards

actually meat prices have not

actually meat prices have not stayed the same over the past  four year period and are you so aware given you have substituted for other food sources by 80% as you suggest..

Seems selling your shares and reducing debt serving plus some radical substitution reflect your increase in disposable income...

 

What landlords, farmers,

What landlords, farmers, power and petrol companies have in common is the apparant in-ability to see the consumer and the economy cannot pay ever higher prices.  The petro companies I think get it and are being mecenary in how they go about managing the situation.

Indeed I suspect the last is knowingly and willfully keeping us adicted.  By that Im sure they figured out that there is a limit on how much ppl can pay for petrol as sales have declined and I think thats been a surprise.  NZ Power companies are seeing the same thing as power use is down, Im not so sure the old annnual useage increases are coming back.

Ive watched meat stay essentially the same $s for 4 years, maybe even drop a bit. I now buy 10~20% of what I used to, thats also reflected in falling meat consumption stats....its interesting watching just what consumers are cutting back on.

If the likes of Big Daddy are any indication Im not sure landlords get it, yet,

Meanwhile costs are ever rising, councils etc dont seem anywhere near realising the problem that they have...

regards

what if interests paid on

what if interests paid on borrowing are lower?

for that, what if borrowings are lower?

for that, what if land prices are lower?

fot that, how to make land prices lower, both dairy land and AKL urban land?

From what I heard, dairy farmers made bettter returns on their land values instead of their business - selling milk.

NZ cannot get rich by selling and buying land. Banks will get rich from these. It is when land price were bid up to a price that no NZer can afford, would all foreign cooperates crawl in and grab all.

I am see NZ is going down on this trajectory.

I am see NZ is going down on

I am see NZ is going down on this trajectory.

So this Ms Trajectory must be pretty nice, if NZ wants to go down on her, is that right?

 

 

All good questions: - by NZ

All good questions:

- by NZ standards rates are extremely low currently but.....

at some point borrowings will be lower because...

at some point the land, urban or rural, will become I agree, totally unfortable and non-profitable for any purchasers including foreigners..... at which point......

...the land price will fall ...and 

....the banks will be making losses, not profits

It's all a cycle, but sometimes a lot longer than one expects, and the latter part of it often when least expected (especially by the young) ...but it always happens in the end